02222cam a22002537 4500001000600000003000500006005001700011008004100028100001600069245007100085260006600156490004100222500001600263520119900279530006101478538007201539538003601611690011201647700001801759710004201777830007601819856003701895856003601932w4314NBER20161209120447.0161209s1993 mau||||fs|||| 000 0 eng d1 aDow, James.10aArbitrage Chainsh[electronic resource] /cJames Dow, Gary Gorton. aCambridge, Mass.bNational Bureau of Economic Researchc1993.1 aNBER working paper seriesvno. w4314 aApril 1993.3 aIn efficient markets the price should reflect the arrival of private information. The mechanism by which this is accomplished is arbitrage. A privately informed trader will engage in costly arbitrage, that is, trade on his knowledge that the price of an asset is different from the fundamental value if: (1) his order does not move the price immediately to reflect the information; (2) he can hold the asset until the date when the information is reflected in the price. We study a general equilibrium model in which all agents optimize. In each period, there may be a trader with a limited horizon who has private information about a distant event. Whether he acts on his information, and whether subsequent informed traders act, is shown to depend on the possibility of a sequence or chain of future informed traders spanning the event date. An arbitrageur who receives good news will buy only if it is likely that, at the end of his trading horizon, a subsequent arbitrageur's buying will have pushed up the expected price. We show that limited trading horizons result in inefficient prices because informed traders do not act on their information until the event date is sufficiently close. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aGorton, Gary.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w4314.4 uhttp://www.nber.org/papers/w431441uhttp://dx.doi.org/10.3386/w4314